Ladies and gentlemen, good day and welcome to the Q2 FY 2023 Earnings Conference Call of Tech Mahindra Limited. As a reminder, all participant lines will be in listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. C.P. Gurnani, MD and CEO for Tech Mahindra. Thank you and over to you, sir.
Yeah. Thank you. Good evening to all. Welcome to our earnings call for Q2 FY 2023. I know the last few years have been a little challenging. On one end we had the pandemic, the other end we had disruptive technologies, climate change. All I can say is that we remain focused on our core purpose. We have aligned ourselves to the new world norms, and we continue to drive positive change in the lives of our communities. We will continue to rise on the three pillars of more equal world, being future re-ready and creating value. Our efforts in sustainability, our efforts in, you know, diversity, our efforts in equality have yielded very, very good results. We've been creating value for the stakeholders and the community alike. We have delivered reasonably good financial outcomes, and we do believe we are making a lasting impact.
We constantly believe and practice there is no trade-off between purpose and profit. Thank you again for your support. Our strategy on focusing on data, focusing on discipline, focusing on new competencies, new technology development has resulted in profitable growth, 3% quarter-on-quarter in CC terms. Revenue now close to $1,640 million. CME has grown 3.1% in CC terms. Enterprise has grown 2.8% in CC terms. On year-on-year basis, CME has grown little over 20% on CC terms, and Enterprise Verticals have grown 14.4% on CC. Our Team Agarwal's focus on integrating the acquisitions, driving synergy goals continue to give us good returns and good results. Large deals we had committed that we would be in the range of $700 million-$1 billion.
We think that $ 716 million, despite of some of the, you know, last minute slowdown in decision making is a good result. EBITDA margin also we gave a salary hike, but we still delivered 15.1%. That's basically because of a very sharp focus on operating metrics. Generated a free cash flow of $ 253 million, which is again one of the better ones. The board has agreed to a special dividend of INR 18 per share. Most of this I would like to say Rohit can cover in detail. On a management perspective, me and the management team are cautious of the slowdown and the coming winter. We have made our own plans A, B, and C. We will be agile, we will adapt, and we will continue to monitor the global situations.
I genuinely believe that the company is in a better shape as we go through some of the rough economic conditions. More important is that your technology investments in Metaverse, and I'm sure Manish will share in detail, 5G connectivity, customer experience management, some of the investments that we have done on the network operations are all yielding good results. So between Rohit and Manish, they will share more about numbers and the competencies that we have developed. Over to you, Rohit.
Thanks, C.P. Good evening, everyone. Let me now cover the company financials for Q2 ended September 2022. We ended our second quarter with revenues of $168 million, versus $162 million last quarter, up 2.9% QoQ in a constant currency basis. Growth was broad-based with CME growing at 3.1%, Enterprise growing at 2.8% in constant currency terms. Our deal wins continue to look positive with the TCV closing value of $716 million. Revenue in INR terms was at INR 13,129 crore versus INR 12,708 crore in Q1, up 3.3% quarter-over-quarter. The EBIT for the quarter was at $184 million.
In rupee terms, INR 1,492 crores versus $177 million in Q1. The EBIT margin was 11.4%, an improvement of 40 basis points QoQ on a reported basis and an improvement of 70 basis points on a constant currency basis. As we've articulated earlier, we've executed on improving utilization, which has helped the margin by 60 basis points. We've also taken measures on discontinuing certain low margin business which has helped the margin by 20 basis points. We've got SG&A savings of 60 basis points. Price improvements which we'd articulated before we're working on with customers has helped us in the quarter by 50 basis points consecutively now for two quarters in a row.
This all, as C.P. mentioned, was an impact that helped us offset the wage hike and inflation, which was around 120 basis points. The currency which I mentioned for us was a net headwind of 30 basis points. That's the broad margin drivers. Moving on from EBIT to other income for the quarter. It was at $36 million versus $16 million in Q1. Foreign gains were higher compared to the previous quarter, from $16 million versus $7 million. The tax rate for the quarter settled at 21.9%, which is lower from last quarter of 22.8%. This is because certain one-off items we saw in Q2. Normalized tax rate for us is around 25%-26%, which we'd articulated earlier.
The net profit margin for the quarter is at 9.8%, which is a 90 basis point improvement from Q1 and close to a 120 basis point improvement on a constant currency basis. Our free cash flow for Q2 FY 2023 was at $ 253 million, which is 159% of PAT as we catch up over the spillover effect that we saw from Q1. Our DSO has increased by 2 days from 100 to 98, and this is our better collection rigor and operating follow-ups. As we mentioned earlier, we continue to consistently follow our rule-based hedging policy. As of September 2022, the total hedge book was at $ 2.4 billion versus $2.3 billion in Q1 2023.
Based on hedge accounting treatment, net mark to market gain for 30, September was at $ 75 million, out of which $16 million went to the P&L and the gain of $ 59 million went to the reserves. We had cash and cash equivalents of $ 947 million, in rupee terms INR 7,703 crores. We are committed to prudent capital allocation and returning back to the shareholders. On that basis, the Tech Mahindra board has approved a special dividend of INR 18 per share, which compared to last midpoint is a 20% increase from last year. With that, I open it up to Q&A for the rest of the time we have for the call.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Chirag Acharya from Ashika Institutional Equities. Please go ahead.
First question. The net new deal wins during the quarter, if you can provide the bifurcation for enterprise and communication vertical? Second question, geography wise, which territory you feel that highly impacted due to the slowdown and also vertical wise, other than communication segment vertical, specific, any observation you witnessed that the client delaying their decision making in terms of CapEx spend, which are those areas? That's it from my end.
Sure. From a deal win perspective, we've stopped that disclosure or split between communication and enterprise. You know, I can let you know that communication, and Manish will talk more, continues to benefit from the 5G tailwind that we have. In the marketplace, our position in that area benefits us from a consulting to an execution standpoint. That continues to be a tailwind. From a growth, revenue growth perspective, geography growth is quite broad-based this time. U.S. has grown 2.5%. Europe, when adjusted for currency, has grown 3.5%. The rest of the world, adjusted for currency, has grown 3.4%. It's been broad-based from a geo perspective as well.
When you look at decision making, I would say nothing that is a trend that we see right now from a customer behavior standpoint that is coming out. Given the macroeconomic environment, the impact of the war on Europe intensifying the energy pricing and overall inflation in Europe, I think that's something that is you know from a geopolitical standpoint gonna have a bigger impact we feel. Nothing that's yet percolated down into our customer behavior. That's the current view we have. As we go forward, pipeline still looks robust. You know, our deal momentum continues. But we'll continue to watch the environment cautiously.
Many Indian telecom operator started giving orders for their 5G-related requirements. How we place to take benefit of those, because our major concentration is outside India. Also lot of PLI scheme is introduced by government to make India, you know, telecom equipment manufacturing hub. How our design vertical is placed to take advantage of it?
Yeah. Manish, would you like to take that question, please?
Yeah, absolutely. I think, Chirag thank you for asking that question. As far as the telecom network equipment business is concerned, I think we have, we've always said that that's not a business that we are participating in. We want to continue to stay focused, you know, C.P. alluded to earlier. We appreciate, you know, all your guidance as well, in keeping us focused on our core and core purpose. Software integration engineering, both around software equipment as well as devices and operations, I think are the focus areas that we continue to be a dominant player across the world, including in India. As the design happens and as the rollout will happen, we will continue to work with the service providers in India in helping them realize the value of the network.
As far as the underlying physicality of building the network and deploying it, that's, you know, it's probably a very voluminous game. It is not something that aligns with our business strategy. Balancing our long-term strategy with profitability and of course our core competence. I think we are very clear what we will do, and we are positioned very, very well. In fact, we've also one of the businesses that we run is around supporting one of the Indian service providers in helping with their enterprise 5G business. We continue to play that role, and we feel very good about it with all the major operators in India.
Thank you. All the best.
Thank you. The next question is from the line of Ravi Menon from Macquarie. Please go ahead.
Hi. Thanks for the opportunity. Hi, tech is a vertical that most of the peers have not really reported?
Sir, if you can speak closer to the device, please. Your audio is not clearly audible.
Sorry. Hi, Tech is a vertical that most of the peers have not reported good growth in. Your growth here is very strong on a sequential basis. Are there any new accounts that you entered through acquisitions like Allyis and Infostar that are helping us here?
Yeah, you know, as we've mentioned, I think almost three quarters back, this is an area or vertical for us, which is a growth driver. We've invested both inorganically and organically in the competencies that are helping us drive growth here. From either the capabilities that we built in from either cloud competency perspective or areas that you mentioned are helping us drive growth from better customer coverage. Making sure we are gaining better share of the wallet with each customer because we have multiple competencies to offer. Then, you know, the combination of service offering that we acquired combining with our core IT competencies together are enabling us better deal wins and better penetration with those customers.
It's all, you know, jointly working together through that vertical which is helping us. We see the momentum continue as we move forward with more and more penetration on existing customers. Thats less of, I would say, new customer added, but more customer penetration that continues to be strong. Jagdish, you wanna add something? You're on the call as well.
Yes. Yeah, thanks, Rohit. You know, I think one of the things that's actually helping us, as Rohit said, is both the organic and inorganic but m ainly our strategy with hyperscalers. That we see as the one key driver that's helping us drive growth in a complete 360-degree manner. Working with them, in creating market opportunities and working through them about creating some of their product development, digital engineering parts and so on and so forth. That's driving primarily the growth. We see this as a continued momentum that we want to continue.
Great. Thanks. Given that we got good deal wins this quarter as well, and utilization is already pretty high at 85%, why have you chosen to allow our software headcount to decline quarter-on-quarter?
This was something we'd articulated even last quarter, that we made certain investments in the business over the last previous two quarters. We want to use this quarter to improve our operational efficiency and performance. With utilization which we peaked at a period of 89%, I think we still are at 85%, right? We've, you know, based on those investments, we've come back from as low as 80% to 83%, now to 85%. We still have, you know, room to go forward. This we'd articulated, you know, earlier as well. As we move forward based on demand environment, the pipeline that I said is looking positive. We'll continue to drive additions on those skills as well as continue to utilize the internal talent base which we're skilling in different digital skills better as we move forward.
Agreed. Could we assume that some of this, you know, though it is showing up as utilized, is not really translating to billing? Should we expect some realization improvements to help us?
Yeah, it would. I mean, from this quarter's perspective is that it does help us from a revenue growth perspective with increased utilization, margin gets better. You know, and as we move forward, we continue to see that happen. Yeah, I mean, we still have operational room for us to drive both revenue growth as well as margin expansion.
Great. Thank you.
Thank you. The next question is from the line of Rishi Jhunjhunwala from IIFL Institutional Equities. Please go ahead.
Yeah, thanks for the opportunity. A few questions here. Firstly, you know, there seems to be a very sharp decline on a sequential basis in our top five clients. When adjusting for cross-currency, it seems that there would have been a decline in a quarter which is otherwise usually strong. Just wanted to understand any peculiar cases of ramp downs that we have witnessed or any pricing corrections there?
Not really. I mean, pricing is on an upward trend, as I mentioned, so not really pricing. There was a couple of projects, which, you know, from an implementation closure perspective, came to a close from a timeline perspective. That caused a dip, but otherwise no trend in any of those customers beyond that.
Understood. Secondly, on the margin side, you know, given that results are behind us in Q2, Q4, we've seen some momentum in some of the verticals there. On the flip side, we have cut down slightly on the hiring. Just wanted to understand, you know, the trajectory from a margin perspective. Are we still on track to exit at 14% for the year?
I think, as I mentioned earlier, right, our levers continue to be similar. We still have headroom to go in each of those. As we've said, you know, I'll repeat all those actions. Pricing continues to be a very strong lever for us. We work it as a program. We're continuously going for opportunities there, so that will continue to drive margins for us in the current quarter as well. If you look at, you know, utilization, as I mentioned, we still have path to get better there, as we move forward. We are also looking at a lot of internal efficiencies by, you know, combining certain support and middle office functions. That gives us some benefit as well on operating performance and leverage. We'll be driving that as well.
Offshoring, while we did a lot of actions there, but some of the new deals had some on-site component which doesn't show in terms of improvement. We'll continue to drive that, going forward as well. If you see Subcon, we are still at a higher level, though we've reduced it quarter-over-quarter. Those are the programs that we feel that we have enough juice left from a margin expansion standpoint. That all will continue, and we'll drive it like a program. Also we're continuously looking at, you know, areas with low-margin profile and take a call on either divesting or discontinuing that in this quarter.
I mentioned that we took action on a portion of that business which reflects in the BFSI segment, and that gave us a margin uplift, but mellowed down the growth, which otherwise at a company level would have been close to 3.4%. We'll drive all those actions. I think what we have to also continue to look at is the global economic scenario, how it reflects in the second half. I think that's something that we'll watch and be cautious about as we continue to drive these actions.
Understood. Just one thing on impairment charge that you've taken in this quarter. On the consolidated financials, the impact is $ 244 million, but on the standalone the impact is more than INR 4 billion. One, which subsidiaries or acquisitions are these related to? And secondly, why is there such a big gap between the two?
At a consolidated level, you know, I would say it's due to the small investment we made around 12-14 months back, which didn't get us the right value we anticipated. We took a proactive call to move out of that. That's the impact on the consolidated side, which is pretty small investment and hence the impact being so low. At a standalone level, you know, as we articulated before, it's not really the legal entity view that we should look at, because when we're working, you know, across the company, it's more across legal entities that the projects are delivered and hence it's a little bit more from management view. Hence, you know, from a legal entity perspective, that doesn't really reflect the performance of that segment. From a you know main impact perspective, it's Target, which is the entity where we've taken the impact.
Understood. Thank you so much.
Thank you. The next question is from the line of Ruchi Burde Mukhija from Elara Capital. Please go ahead.
Thank you for the opportunity. Two of my questions are answered. I have two more. You've been talking about portfolio pruning as a lever for margin. Could you talk to us about how this process is progressing and when do you expect it to conclude? That's one. Secondly, if you could talk about some indications from client on furloughs, how do we see December quarter in terms of furloughs? That's it.
I think from an estimate perspective, we said our actions are targeted around $120 million annualized revenue impact. Which we identified through March as from a divestment or discontinued business operation standpoint. We've executed on an annualized basis almost $60 million of that, which is reflecting in the current quarter. We are close to executing the rest in the next two quarters as we move forward. On an annualized basis should be anywhere between $100 million and $120 million.
On further indications?
Yeah. So far, no different trend, you know, from what we saw last time. I think we're still looking and evaluating as we move forward with our customer base. Maybe marginally higher than what we've seen in the past. You know, also we have actions to, you know, mitigate some of it. We're working through that in the current quarter as we move forward. But I won't say substantial difference from what we've seen in the past. Maybe a little bit on the higher side is what we're seeing.
Thank you.
Thank you. The next question is from the line of Vibhor Singhal from PhillipCapital. Please go ahead.
Yeah. Hi. Good evening. Thanks for taking my question. Just a couple of clarifications. I probably didn't get this properly. You mentioned that this portfolio pruning exercise might continue for next two quarters as well?
Yes, that's right. That's right.
Basically by the end of this calendar year or this financial year, 4Q this year, we expect this process to end, and thereafter the margin benefit that you say will probably start flowing down as well?
Yeah. I mean, from an action perspective for this year, that's what we've identified and we'll execute. From that perspective, that's the target we've set for ourselves. You know, this is an exercise that we will keep on discussing as we move forward into next year. We still have some pruning to do, but for now, that's the immediate focus that we are going to execute, and we'll keep you updated on the progress.
Okay. As of now we are looking the activities that we have decided upon, that should end by 4Q, but we might take up on similar exercise next year also. That's what you're saying, right?
Yes, that's right.
Okay, sir. Just one last question. Our EBIT margin guidance remains, right? That we are looking to target 14% exit rate in 4Q this year.
Yeah. I mean, Vibhor, from our perspective, as I mentioned, the headroom is still there on all the operating levers. We'll continue to drive that. You know, as we move forward towards the second half, the growth environment and how the situation in Europe pans out will be an important driver, right? Because already when you look at it, you know, while the reported EBIT is 11.4%, operational is more like 11.7%, right?
Got it.
That also plays a role there. Growth effects, those will have some impact there, but we'll continue to work towards our actions that we've defined for ourselves. Given the Q2 execution, we continue to be confident that our actions are working and, you know, we'll keep on working in that direction going forward as well.
Got it. Sir, since you touched upon the European parts, if I could just squeeze in one more question, a more objective kind. Basically, we are almost one month into the third quarter as well. I'm sure there are so many parts of Europe that have already started seeing some sort of winter setting in. What is the overall basically feedback that you're getting from our clients, especially in Europe? I mean, how well are we prepared to, I mean, face this winter? Are we concerned about plant shutdowns or similar kind of activity which might lead to not just us in terms of the entire industry per se, some loss of revenues or pushback or postponement of their IT CapEx? Any color on that would be really helpful.
Yeah, sure, Vibhor. I think for now, we're not seeing anything dramatic from a Europe standpoint yet. There are discussions that we're following it up more from a macro standpoint. We're looking at, you know, what the energy prices looks like. It's getting more and more steep and the impact is obviously more in certain countries versus the other. But from a client standpoint, yet those specific discussions are not panning out. More, not so much in Q3, but as we continue to move to Q4, we feel, you know, that is the potential that we need to watch out for.
Got it. Okay. Great then. Thank you so much for taking my questions. I wish you all the best.
Thank you, Vibhor.
Thank you. A reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.
Yeah, thank you. Sir, I just wanted to kind of follow up on, you know, the plan to, you know, kind of prune the $ 100 million-$ 120 million annualized number. Is this mainly on account of, you know, client-specific exits which you're planning, or is this also include, you know, some actions we are taking here on investment of subsidiary funds, you know, where we might be exiting or we might be kind of trimming back leading to an impact on revenues?
I mean, it's not specific to different areas. The non-strategic areas where we feel we're not getting the right, you know, return on investment, which doesn't have potential for us to scale up. It's a mix of all of that through which we've identified those actions. You know, what we've executed is all of that in those buckets. As we continue to move in the next two quarters on similar lines, you know, we will drive that. It's non-strategic, you know, no scalable possibility of driving that improvement, and the return on investments really, really low right now.
Understood. Also, you know, I think this is something which has been discussed, I think multiple times earlier also. You know, because you disclose your revenues on IT services and BPO separately, there seems to be a fairly wide gulf which sometimes appear between the two growth, you know, like, this quarter. You know, any reason why the BPS grows or BPS grow so strongly while IT services kind of trails it? Or, you know, is this something which is, I would say like, kind of, part of the same equation and it just gets reported that way? How should we see this going forward also given the, again, the wide difference in the entire addition in both these spaces?
BPS does have seasonality impacts. If you look at the current quarter, it's a headcount that's ramped up from a seasonality perspective. So that drives little of those differences or dynamics, you know, which create the difference between both the areas. From an overall perspective, you know, BPS business continues to drive better performance for us if you look at last six to eight quarters. Our investment that we did in that business, both organically and inorganically, is positioning us to drive every quarter more than 5%, you know, quarter-over-quarter growth. That trend continues. You know, the current quarter difference is more from a seasonality point of view.
Sure. One final question on, you know, again, sorry, following up on margins. Given that you are taking multiple actions to, you know, meaningfully improve your profitability over next two quarters. Any initial thoughts on, you know, how should we think about FY 2024 in terms of levers which you guys have to continue to drive margin improvements from, you know, here onwards? Because, you know, again, there is a quarterly cycle that you have dipped, you know, Q4 with 14% or thereabouts. You will have wage hikes which will come in, which will again pull back your profitability numbers in 2024 to where, you know, I think your 2023 numbers will end up like. How should we think about the levers which you guys have to further scale up after taking, you know, maybe 1, 2 basis points over next 2 quarters?
Yeah. I think we articulated our actions which are short term, which is what we said. I just articulated before that we're driving and we'll continue to drive that over the next two quarters. Those short-term actions will continue because that's a regular part of, you know, our quarterly operations. From a structural and long-term perspective, there are two or three things that we'd articulated that we will do, which will not just drive change next year, but even more in terms of next two to three years. Right? One is the geography mix. If you look at our mix, you know, we were around 47%-48% U.S. geography, which are now close to 52%. Obviously, some of it is effect and impact of steam age Europe.
Even if you take that out, the mix in U.S. is going up and Europe is going up versus rest of world. Right? That's one area we'd articulated around 12 months back that we will push to make our investments in those years better and hence change that mix over the next 3 years more in line with you know getting that better towards driving better margin outcomes. That's one area structurally that you'll see the difference. Second, we'd also articulated that some of the investments we've made in large deals and executing and setting the structures you know COEs of making large deal execution and building that as a investment that will start giving us some benefit or you know kind of leverage as we move forward.
You know, some of the large deals getting into on the mode of 12- to 18-month cycle and post that giving margin benefit next year should give us, you know, return there as well over a year-on-year basis. Right? That's the second area. As I mentioned, streamlining the portfolio or streaming out the low investment buckets will always be a drive that should continue to drive margins for us. So I think structurally that will continue for us as we move forward. Also when we look at our competencies, some of the competencies like digital engineering which give us a better return. We are through various organic and inorganic investments, developing those investments, and that also should give us a better margin mix as we move forward. Those are some of the areas that we're investing to drive better outcomes more structurally as we move into FY 2024.
Understood. Thanks a lot for answering my question.
Thank you. The next question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.
Yeah, thanks for taking my question. I have.. Sorry. Two things. One, on the demand side, while I know that, you know, our performance till now doesn't reflect anything, any kind of weakness, nor our discussions with customers are showing any signs of that. What is your sense, will we get more clarity, when they start the next year budget? Or do you think, there is some other signs which you would be tracking to gauge the demand for the next year? That is number one.
Number two, while I agree that, you know, you have answered in different ways the margin question, but I would like to still probe a little bit more on that. Do you think that, you know, internal operating metrics are enough for getting margin benefit from here, which comes from here? Or you think that, you know, there are external levers as well, like, there is a scope for price improvement or something which can further aid our margins? Thank you.
On a demand view of second half, maybe, you know, I'll open it up, respectively for Com, for Manish to give a view to you and Deepish and Vivek, in terms of what we're seeing. Generally, maybe as a starting point, we continue to look at our pipeline, on a very regular basis, how that's moving across geography, how that's moving across verticals. Our timeline to close deals is actually changing, quarter-over-quarter from what we had to now on a significant basis or marginally. We continue to monitor these triggers, and that's why I said when we look at our own internal data trends, we don't see some of that, reflected in what the macro discussions are.
I think as we get into second half and next year, I think a possible, you know, kind of recessionary phase seems imminent, more likely in European region than in U.S. Maybe U.S. would lag with that impact more towards sometime middle of next year. I think that will have a gravitational impact on us as we think about second half at some point if ever for next year. We're keeping all that in mind, and our internal actions are driven towards that possible scenario as well. I think specifically on those segments, maybe I'll just open it up first to Manish to talk about comms and how he's seeing the customer discussions as well as view around the demand environment for the second half of next year.
Thank you, Rohit. And thank you, Sandip, for this question. On the demand side, you are absolutely right. I think we will indeed continue to get more and more clarity as the year winds down and people finalize their budgets and assess this calendar year, this fiscal as well. With that said, I think our overall funnel and pipeline of all kinds of discussions that we are having across the world continue to remain very robust. So depending on the budget year, there could be an impact as we go forward with some of the decisions. But therefore could be some reprioritization of where the money is spent, you know, contrary to probably where the money was spent in the last two years on the technology side.
It is very, very clear that with all the gains that the enterprises have and the telcos have achieved over the last two years, the focus on tech spend will continue to remain high. There will be no doubt a little bit of reprioritization. For example, in the last cycle, they spent a lot of time and continuing to build platforms for customer experience management. Going forward, we start seeing a lot of activity in more open designs, open architecture, creating and converting their network assets into more of a platform play. Some of these stories will play out as the year ends and the next year starts. At this point, I think we do have both kinds of discussions that are happening in terms of looking at the current spend.
At the same time, you know, which is a cost play, a savings play. At the same time, some discussions around increasing the velocity on a few reprioritized digital projects, whether it is in the network realm or in the underlying digital realm. Absolutely, I think, you know, the next two, three months are going to be crucial to continue to watch for this space. Jagdish?
Yeah, Manish. Thanks, answering the question. I think we did similar commentary there also on the enterprise side to what Rohit and Manish spoke about.
Sir, Jagdish Sir, sorry to interrupt. Your audio is a bit muffled, sir.
Okay. Is this better?
Yes, sir. Please proceed.
Okay. Hey, thanks. Just similar commentary I think to what we heard from Rohit and Manish. Primarily, we may see an impact in Europe more so, not that the deal pipeline or the demand is not growing, but probably decision-making on closure on certain things may have an impact in Europe, and so we have to watch it closely. Good part is that, the investments we did on tech and continue to do around the four areas that we feel are critical, cloud engineering, connectivity and experience, and also our ongoing business around sustainability tech. These are things that we don't think are going to be cut down, and there will be a requirement for these service offerings irrespective of the speed of decision making.
That plus our, you know, large deal pipeline continues to look robust. Those are positives, and we probably have to keep a watch on how the decision-making time frames, as Rohit said, is a key parameter that we keep a watch on.
Okay. Thank you. The next question is from the line of Girish Pai from MBA. Please go ahead.
Yeah. Thank you for the opportunity. I had a few questions on price realization. Rohit, you sounded a bit cautious on pricing the second half of FY 2022. Today you seem to be sounding a bit more positive. Has something changed? Secondly, are you having any price-related pushback from any section of your clients with the kind of macro that we're seeing right now and, probably a shift away towards cost optimization or savings-related kind of work that you will probably see in the future?
Yeah. On pricing, you know, I mean, it's natural from a view perspective that, you know, as we continue to see, and been looking at this from a macro perspective for a while now, right? From that aspect, while we were confident of our internal, program approach standpoint, but that impact was always looming and hence that view. I think as we move forward, at least from a current quarter perspective, we continue to see the pipeline, which we can execute on and see that benefit that we built up over the last two quarters continue. As things move, change or whatever happens, I think, that scenario will now probably play out in Q4 rather than Q3. I think from that perspective, it's slightly better than what I'd anticipated.
You know, our programmatic approach and pricing will continue. I think from a customer standpoint, I mean, there are, as Manish mentioned, some discussions going on various priorities in the customer are happening, and we are a critical part of that solutioning, either be it, on their journey towards a, you know, a cost, approach standpoint that they're looking at IT from IT or even from a BPO standpoint. But I wouldn't say that, you know, it's radical or it's, you know, quite a number of them happening. It's right now not a trend that we see, while we continue to proactively work with customers.
The other question is with C.P. Gurnani's comments where he said, you know, we got about $760 million TCV, and he kind of hinted that we could have got a lot more, but because of decision-making being slower. Was there any specific geography or any particular verticals that, you know, where this concentration of decision-making being delayed on that front?
Not any specific geography or vertical. It's just a couple of deals that, you know, from a closure perspective spilled over to the, you know, current month. In order booking and deals decision, that's why we always talk about a range. These are not that specific that, you know, you kind of decide that this is the time it's gonna happen and it pans out, right? There's a lot of variables. From that perspective, we're in the range and, you know, that hence the view from his side was the pipeline's strong and we continue to see momentum that reflects that conversion. Hence the trend for now will continue as we move forward.
You know, as I continuously reiterating that this is a dynamic scenario, and we're monitoring it closely. That's an area that, you know, as we move into the next couple of months, we'll keep on updating you as we see any changes happening.
Lastly, this $700 million-$1 billion of TCV, that guidance, that remains for the next couple of quarters or will that change?
Yeah. Right now I think there's no reason for us to change that, and it stays for what we articulated. Yes.
Okay. Thank you very much.
Thank you. The next question is from the line of Venkat Samala from DSP Investment Managers. Please go ahead.
Hello, am I audible?
Yes, sir.
Yeah, yeah. Thanks. Thank you all for the opportunity. I know this question has been asked in the margins, but then just a little further probing on that. You did mention a lot of levers plus the portfolio pruning exercise that you are undertaking, right? Given the fact that, you know, this quarter we had the high headwind for us, and given the, you know, lever that you spoke about, which will play out in H2 as well, should we expect a more sharper jump in margins versus 30-30 basis points that we saw this quarter?
Yeah. As I mentioned before, I think, you know, our actions still have headroom in that to continue to drive that. The recourse that I continue to reiterate is how the group pans out. You know, compared to first half, there's a bit more uncertainty. You know, furloughs example we spoke about, which is marginally higher, as I mentioned, and then other dynamics which might change as we enter Q4. Growth obviously will have a little bit of impact on how those translate into the P&L. From our perspective, I think, all we are focusing on is driving those actions, and ensuring that, you know, what we set ourself as goals, we continue to drive that as well.
Understood, understood. A related question to that is, you know, the proactive portfolio pruning we are doing, do you think it presents a material revenue event on a net basis for us in H2, given the fact that, you know?
It seems like we lost the connection for Mr. Samala. We move to the next question from the line of Viraj Kacharia from SiMPL. Please go ahead.
Yeah, hi. Thanks for the opportunity. I just have two questions. First, I didn't get the explanation on the impairment charge in the standalone operation. If you can explain again, please, you know, what is the charge relating to?
Yeah. On our impairment basis, as we mentioned before, our strategy is to integrate businesses as we, you know, kind of do our, you know, we'd articulated a few sessions back, I don't remember, maybe 6-9 months back, we did a specific M&A session with Vivek. We articulated that our strategy is now to integrate all the portfolio companies into the core business. That integration means, the front office, back office. Also the business that we do, doesn't follow a specific legal entity, automatically. To measure the performance of a particular business, you gotta look at cross entities, which is not really represented to the charge that comes at a specific, entity on a standalone basis. Hence, a consolidated view gives a different impact to the impairment. From that perspective, the standalone impact doesn't really impact or affect the performance of that business in a true shape or form.
Okay, thank you. Second question is, you know, you talked about portfolio pruning as a lever for margin improvement. But to just kind of drill a little deeper into this, what has driven margin erosion in those businesses in the last, say, one and a half year? Because, you know, from a business point of view, our utilization is also not to a level where it was say a year back. There seems to be a good amount of avenue in terms of, you know, making good use of the utilization. Just trying to understand from a business point of view, what has driven the margin erosion in those businesses that we're looking to prune?
Various factors, you know, where the returns or the pricing is probably not up to the point that is non-strategic or not core to our region. It doesn't really derive from a synergy perspective. Various factors. Geo is another area where we feel we don't have the scale to get the benefit there. It's multiple of those that we try to take actions on. I think from a current quarter perspective, it's a 20 basis point improvement on margin while almost a 1% impact on the discontinued business. As we keep on moving forward, we see similar impacts between 20-40 basis points on actions that we will take, and we keep you posted on specific areas around that.
What I really meant is in terms of verticals or geographies, can you kind of give a more detailed perspective, which verticals these are largely in or which geographies these are largely in?
Yeah, it's across. I think as we execute our or do that in this current quarter, the impact is more on BSS and the geographies is ROW. That's where you see the impact coming through. As we execute the others, we will share better transparency as well.
Okay. Of the businesses which you acquired in, say, last year and a half, any perspective you can give in terms of how the margin performance been in those businesses? The portfolio pruning is largely in the ROW or other businesses, but it's not really in any of those acquisitions.
No, not there. I think that those are, as we mentioned earlier, integrated to our core offering, helping us continue to, you know, close deal wins to the better range that we see now versus what we saw earlier. They are fitting in well, integrating. We're working on specific integration. As you remember, we mentioned that this year we are focusing on integrating new business, and these are almost ten different acquisitions that we've acquired. Integrating their front office, back office, aligning cultural integration with them, and you know, aligning the back-end support, finance, all that takes a significant amount of time. Our focus there is that. From a return perspective, they are performing very close or better to the business case that we bought them also.
I think for now, those are moving on track. I know, Vivek, if you wanna add something on the portfolio integration, progress there for me. Yeah. I think just adding on to what Rohit said, real success ultimately for us is measured in large deal wins and the influence of these new capabilities we acquired and how well we've integrated them. From an operations perspective, the focus is on driving higher value to the customer. Can we take a more share of the wallet from the customers with new and expanded offerings? From an efficiency perspective, it's about standardization of our systems, processes, and any cost savings there. Those are really the three vectors on which all the integration activities will run across all the acquisitions and portfolio prunings.
Okay. Thank you.
Thank you. The next question is from the line of Dipesh from Emkay Global. Please go ahead.
Thanks for the opportunity. Just two questions from my side. On BFSI. BFSI remains so. Can you provide constant currency quarter-on-quarter growth first about across verticals, particularly on enterprise side? Second thing is why weakness is visible in BFSI? Second question is about low margin business exit strategy that you highlighted about $ 100 million-$ 120 million kind of impact annual business. It is more skewed towards IT business or BPS business? Thanks.
You know, I'll answer the second part of the question, and then probably will have an answer on the first question. Rohit talked about pruning and rationalization in our portfolio. A lot of what we pruned this quarter is in BFSI. Hence, you see softness in BFSI on a quarter-on-quarter basis. We believe it positions us better and stronger in the longer run. There is no impact or no change on a demand perspective. On the quantum of pruning, if you look at BFSI on a continuing business basis, excluding the discontinued business, we would have ended up with about 6% quarter-on-quarter growth in BFSI. On an overall basis, the pruning resulted in a lower reported growth of about a percentage point on a quarter-on-quarter basis.
Mr. Dipesh, you have any other questions?
No. Just, can you give constant currency growth for other vertical also?
I think Varun will have the data, and he'll share the data offline.
Thank you.
Thank you. Ladies and gentlemen, due to time constraint, we take that as the last question. I now hand the conference over to Mr. Rohit Anand for closing comments. Over to you, sir.
Yes. Thanks everybody for joining the call today. Just to recap, our Q2 performance has been a result of, you know, driving operating action. We continue to focus on growth as we move into the second half, while watching the macro environment cautiously, especially as it plays out more closely in Europe than anything else. Then, you know, just from a shareholder perspective, reiterating our commitment to, you know, the capital allocation strategy that we've articulated. In line with that, we've given 20% increase versus last year on the dividend, and we'll continue to focus on shareholder value as mentioned before. Thanks to everybody who joined us today.
Thank you. Ladies and gentlemen, on behalf of Tech Mahindra Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.